Five Investing Tips From Warren Buffett

By

Brett Arends

Updated March 2, 2011 12:01 a.m. ET

What does
Warren Buffett
's
message to stockholders mean for you and your money?

Every year Mr. Buffett, the world's third-richest man and arguably the most successful stock-market investor in history, writes a letter to stockholders in his investment company
Berkshire Hathaway
.
The latest came out this weekend. There are usually some nuggets for all those who haven't invested in Berkshire, and this year's letter was no exception. Here are five:

ENLARGE

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway, before being presented the Presidential Medal of Freedom at the White House in February.
Bloomberg News

1. Watch out for stock-market valuations.

Mr. Buffett's company is now sitting on a cash hoard of $38 billion. "That's among the highest levels it's ever been," says Stifel Nicolas analyst
Meyer Shields.
While Mr. Buffett says he is looking for a big acquisition, and has his "elephant gun loaded," the high cash pile also suggests he's having a challenge finding really good deals. If Mr. Buffett is cautious, investors might want to take note: It's another sign that many valuations on the stock market may be looking a little stretched.

2. Coke is it.

Mr. Buffett rarely makes predictions, but in the case of
Coca-Cola
—a long-term holding—he issues a remarkable one: Dividends will probably "double ... within ten years," he writes. That would take them from last year's $1.76 to $3.52 per share. If Coca-Cola stock didn't move over that period, it would raise the dividend yield from 2.5% today to above 5%. Berkshire owns 8.6% of Coca-Cola stock.

3. Some of his favorite stocks are still cheap.

While the stock market overall has boomed, and it's a battle to find cheap stocks, one thing does stand out: Many of Warren Buffett's favorite stocks remain at, or around, the prices he paid for them. As Mr. Buffett only likes to buy stocks for a lot less than he thinks they are really worth, this suggests you can get a bargain or two—although, as always, there are no guarantees.

They include French drug maker
Sanofi-Aventis
.
Berkshire Hathaway has accumulated about $1.8 billion worth of the stock. Sanofi's share price has come under pressure lately as a result of its acquisition of biotech giant Genzyme. At $35, its American Depositary Receipts are now about 12% below the average price Mr. Buffett paid.

Or look at
Kraft Foods
.
Mr. Buffett owns 97 million shares, a hefty 5.6% of the company, for which he paid an average of $33 each. Today the stock is just $32. It has been held back, in part, by the costs of the takeover of Britain's Cadbury. But the stock yields a decent 3.7%. It is a reasonable 14 times forecast earnings, and just over 1.1 times annual revenues.

Mr. Buffett also owns 45 million shares in health-care behemoth
Johnson & Johnson
,
a stake valued at about $2.7 billion. He paid about $61 for the stock: It's now $60, 12 times forecast earnings, yielding 3.6%. A cheap stock.

And what about
Wal-Mart Stores
? It's tumbled in recent weeks to $52. That's just 12 times forecast earnings. And the dividend yield, 2.3%, may not be huge, but it's the highest it's ever been. Today's price is just a few dollars a share more than Warren Buffett paid: Berkshire Hathaway accumulated a $2 billion stake at an average of about $48.50.

No one knows exactly what a share in Berkshire Hathaway is really worth. Mr. Buffett himself told investors over the weekend that if you ask him and his veteran co-manager
Charlie Munger
to calculate the intrinsic value of the stock, "you will get two different answers. Precision just isn't possible."

However, he says, "book," or net asset, value is his preferred "understated proxy for intrinsic value." Mr. Buffett writes, "To be sure, some of our businesses are worth far more than their carrying value on our books.... But since that premium seldom swings wildly from year to year, book value can serve as a reasonable device for tracking how we are doing."

So it's intriguing that Berkshire Hathaway stock today trades at $128,000, or just 1.3 times that book value. Stifel's Mr. Shields says the historic average is about 1.6 times. If the "premium" between book value and the intrinsic value doesn't swing that much from year to year, one might conclude that Berkshire is looking a little cheap.

Naturally, as a big company, it has a lot less growth ahead of it. And as Mr. Buffett is 80, his years of producing spectacular investment returns are nearer the end than the beginning. Nonetheless, in a market where so many investments seem to be trading at lofty valuations, it is notable that Berkshire is below its average.

For those who wish to invest, and who don't have $128,000 in spare cash, the economy-class "B" shares trade for $85.

5. Get ready for a dividend hike at Wells Fargo.

Mr. Buffett's favorite bank, San Francisco-based
Wells Fargo
,
has had its dividend levels held back by the Federal Reserve, along with other banks, during the financial crisis. "At some point, probably soon, the Fed's restrictions will cease," he writes. "Wells Fargo can then reinstate the rational dividend policy that its owners deserve. At that time, we would expect our annual dividends from just this one security to increase by several hundreds of millions of dollars annually."

Berkshire Hathaway owns about $11 billion worth of Wells Fargo stock. It added a small amount in the fourth quarter. At $32, Wells Fargo is just 11 times forecast earnings, and less than one and a half times book value—compared to nearly three times book value five years ago. The dividend yield under the current regime is a paltry 0.6%. Five years ago it was around 3%.

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